New Money Rule #4: Have Short and Long-Term Financial Goals

I was once told that “you cannot achieve something that you do not measure”. Meaning, you can’t achieve a goal without first defining it as one and quantifying your progress toward it.

I think that saying is generally pretty true when it comes to financial goals. “Saving more money (tomorrow)” and “changing our lifestyle (when we feel like it)” are not strategies for achieving financial goals. I guarantee without goals and a plan, you will approach some major life event like–getting married, having a child, buying a bigger house, buying a house, improving your house, going to college, sending your kid to college, going on vacation, retiring–and not have the means to pay for it. For clarification purposes, putting it on your credit card is not paying for it.

So many people pursue these milestones at what seems like the right time, but sometimes find that they aren’t, in their current situation, able to pay for them. Had they taken everything into account earlier, they might have a done things differently, they often say. They would have had specific goals and done things to achieve those goals.

Goals
We need goals for a lot of reasons. But the most compelling reason is that it is difficult to simultaneously manage the present and the future. We all know that having only a short-term, present-biased view of life is not going to lead to the best outcome. Having financial goals and sticking to a plan to achieve them optimizes your decision-making, over and over again. You owe it to your future self to create goals and get on the path to those goals. Money does not ultimately bring happiness, but having a lack of it when you want to pursue a major life event can create a great deal of unhappiness.
I’m making the argument that everyone needs financial goals because I’ve realized upon adulthood that major life events are not givens. Just because you want to do things like get married, have children, go on vacation, etc. does not mean that you have the money to afford them. It takes careful planning and adherence to financial rules for yourself to be able to do these things.
Why don’t people reach their financial goals?
1. Having vague goals – this might be one of the biggest roadblocks. Goals that are too general let you procrastinate, make excuses, and don’t hold you accountable to what you say you want to do.
2. Not taking time to think about goals – you are not too busy to think about the longer-term. It makes a lot of people anxious to think about money and the future, so instead of dwelling on the temporary stress it might cause, focus on the peace of mind you will have after you figure out where you want to be and how you’re going to get there.
3. Procrastination – what is today but yesterday’s tomorrow? That quote might be old, but the wisdom it carries is not. If you never start in on your goals, you can be certain you’ll never reach them.
4. Think about your financial goals in the larger scheme of what that means for your life – knowing the “why” behind your decisions will help you after initial motivation and excitement wears off.
5. Lack of financial discipline – it’s hard to make sacrifices in the near term for things that don’t pay off until later on. Focus on making right choices instead of the wrong ones you may have made in the past.
6. Lack of financial literacy – this is especially important for long-term goals. Knowing how money grows is of the utmost importance.
7. Being negative – one of the worst things people can do is have a negative attitude when it comes to money and saving. If you stay positive, you are much more likely to continue on toward your goal.
8. Not writing down goals and looking at them consistently – The very practice of writing things down so that you can revisit them in an organized format means you’re more likely to stay on track to reach your goal.

Any of these sound familiar? They do to me…I’m guilty of having committed every one on the list. Woof. There was a time when I didn’t have financial goals because it intimidated me to think about them.

It made me anxious to think about simultaneously having to manage future expectations. I thought it was easier not to have them, but found out that that’s just not true. Any extra money I could have been saving was the cost of not having to care about goals and trust that I would figure it out when the time came. It turns out that I actually felt more anxiety when I didn’t sit down and be honest with myself and my significant other and ask “what do I want?”. When I did sit down and write out my goals, it was a huge breath of relief to have a plan. Which is why I want you to have one too! It really isn’t that bad.

I thought I would take some time to share with you my financial goals, and then help you strategize because I think most of us have many of them in common.

As a clarifying point of data, my significant other and I have very intertwined finances. We take turns buying things like groceries and the finest kibble in town. So to get an accurate picture of our money-in, money-out, we are looking at both of our monthly expenses.
Let’s start with short-term and then we can jump to longer-term. It’s actually very important to have both of these. Short-term financial goals are goals that you want to accomplish anywhere from 3 or 6 months to about 5 years from now.

Should either of us be left with an ominous-sounding note when we return from lunch one day that tells us to “stop into the boss’ office at your earliest convenience…and bring your things”, we will be able to keep a roof over our heads.

This is one of the boxes that we get to check! From the day that both of us started working, we have been setting aside money for our employers’ 401Ks (more on that in a bit), and tried to keep our spending low so that we can set aside this money into an online bank account so that neither of us can touch it. We used Ally Bank so that the money isn’t in our everyday checking accounts and we have an inflated sense of how much is really available. Ally is great for emergency funds because you can set the money away in a high-interest savings account and forget about it. You get 6 transactions a month and there are no monthly maintenance fees. Take into consideration how much it would cost you just to live for six months if you didn’t eat out or have unnecessary expenses:

rent/mortgage payment

auto and health insurance premiums (payment)

utilities (electric, water, internet, phone)

gas/cost of transportation

food (groceries)

x6 = emergency savings minimum

2. Pay off student debt

High school may never end, but college does. And after that 6-month grace period, the interest on federal loans starts to kick in. The longer you wait to start paying off those loans, the more interest accrues. Interest is like the fee that lenders charge you for borrowing their money. The slower you pay off your loans and the smaller the loan payment, the greater the “fee” that you are charged.

http://pandawhale.com/ifindkarma/mean-girls

We may may not be done paying off student debt in the 1-5 year range of short term goals, but I like to think of it as a short-term goal because it impacts us now, every month, and should stay in our near-term horizon. The entire amount of student debt we have is not a small amount of money. It will take years of monthly payments, but we want to begin paying it down aggressively while still contributing to important things like our employers’ 401K plans. To do this, we have a mini-goal of paying the minimum payment + at least $200 each month. Additionally, we’ve made the commitment that when our income goes up or when we get bonuses, we will increase the amount of money going toward that payment. As your income goes up during the first decade of your life, make it a goal to keep your expenses flat-lined; this way you can chip away at your student debt faster.

https://indigenize.wordpress.com/2016/02/02/student-loan-saga/

3. Travel/Cost of Living Fund

I think everyone should have a travel fund! When it comes to saving, one of the easier ways to win the argument with yourself to when debating whether to forego some purchase/expense today is to keep in mind the amazing experiences that you can have in the future while traveling. Having something to look forward to can be a great motivator.

Stock motivational photo for you courtesy of http://travel.india.com/articles/railway-budget-2016-5-reasons-why-we-are-looking-forward-to-travelling-by-indian-railways/

We are young, without children (the two-legged kind at least) and have the desire to travel or possibly live somewhere other than Iowa in the coming 5-10 years. The cost of living in Iowa is below the U.S. average. To be able to afford a vacation or a move to a more expensive city (overall cost of living is about 25%–40% less than larger cities), we need to put money away regularly in order to not disrupt ourselves, financially.

Direct deposit can help you achieve this financial goal; find the form you need from your employer to direct $50-100 or however much you can afford each month to a separate savings account so that when the right time comes or an opportunity arises to move elsewhere, you’ve got a starting point for how you are going to pay for it.

How d0 we do it?

I use Ally bank for my travel fund and over the last year it has grown to about $1,100. Simply by foregoing a couple meals at a restaurant or shopping around, you can find the money to direct into your travel fund and not feel like you’re missing out. For example, this last month, simply by shopping around I save $20 off the price of an oil change and instead of going out for pizza two Fridays in a row, we saved around $50. That’s already $70 into our “Asia” fund! Wherever it is you want to go, by cutting small amounts from your expenses each month, you can make small investments into the trip of your dreams.

4. Get Married

This is not one most people typically save for, but I would encourage you to consider it. It’s pretty mainstream knowledge that weddings are not cheap. The average cost of a wedding in the U.S. is around $26,000. That’s not how much we are planning to spend and in fact, that source does cite $10,000 and under being the more common pricetag of a two-people-one-name shindig.

https://www.tumblr.com/search/the%20princess%20bride%20gif

It is increasingly common that the onus is on the couple and not “the bride’s parents” to pay for a wedding. Or if the parents are paying for it, they are contributing an amount of money and rest is up to the couple. Either way, a wedding is likely going to be a major financial undertaking for one party or another, so whether it’s you or your kid you’re saving for, making small monthly deposits to a savings account can help give you peace of mind for where some of the money is coming from. Just as I mentioned in the “travel fund” example, having a savings account with direct deposit of $50-100 can add up fast. If the money is immediately siphened out, it’s not in your checking account to pay for emotions like “I’m too lazy to make dinner” or “buying this dress as a weight-loss motivator”.

Babe and I are pretty open about our desire to someday hitch our wagons to one another, but know that the cost of the “Mr. and Mrs.” title is not cheap. Between the two of us, little monthly savings opportunities, and (cross-our-fingers) the bank of mom and dad, we hope to pay for a wedding without a “honeymoon period” credit card bill to follow us around for a year after the big day.

Long-Term goals:

If short-term goals are like 5Ks, consider long-term goals more like marathons. Long-term goals are long-term investments in your future self; they are some of the most important goals to have. And if we’re likening them to marathons, consider the effects of not saving for your long-term goals like trying to run that marathon at 65 without any training.

1. Retirement

However you want to phrase it, “clocking out at 65”, not “working for the man”, “working on your bucket list”, I think we all want to work toward the goal of not working at some point in our lives. Naturally it will be different for all of us, but it’s inevitable that physiologically (hopefully that word makes sense here) we cannot work all of our lives.

And there is no such thing as waiting for the right time to save for things happening 20, 30, 40 50+ years in the future such as retirement. It is detrimental to wait to save money because of two little words: compound interest. I wrote a previous post on concept because I thought it was so important to understand.

Simply put, retirement is achieved by devout contributions into an investment fund of some sort and compound interest. No matter how much money you think you’re going to make someday, you must must must start saving for retirement today, which is why it’s universally #1 on the list.

Most employers will match your contribution up to a certain percentage of your income, which is why you should make sure you are enrolled and contributing to a retirement plan if it is offered by your employer. You are walking, neigh sprinting away from free money if you don’t. And if saving for retirement is like a marathon, then allowing your employer to match a portion of your contribution is like getting them to run part of the race for you.

I would encourage you to “back into” the amount of money you can be putting away each month to your 401k. Take your income, after taxes, and deduct all of your monthly expenses (rent/mortgage payment, auto and health insurance premiums, utilities–electric, water, internet and phone, gas/cost of transportation, and food).

What you’re left with is a starting point for what you should be contributing to your 401k (or saving another way, if that’s not an option). I emphasize that this is a starting point because sometimes we have a tendency to over or under-pad this equation. We also haven’t taken saving for short-term goals into effect yet.

So you’re left with your “starting point”. The next thing I’d encourage you to do in order to correct for the over or under-estimating that might be happening is to go out and actually look at how much you spent* over the last 30 days on these expenses. Need to adjust? Do it now. If you want to get what might be a more accurate spending figure, I would suggest looking at an average 30-day spend over the last 3 months.

*If you’re spending too much and have unnecessary expenses, that’s another conversation and I want to continue helping you with that on this blog; but it’s a topic for another post.

Now: saving for short term goals. Here’s where things get a little less clear-cut on how much you should contribute from your paycheck to your retirement plan. You want to achieve a balance in your short and long-term goals; things like travel and marriage are great things to save for, but ultimately they are taking away from what you save for your long-term goals. I think the trick is to find the balance of contributing to each of these that gives you peace about things.

I would recommend starting out with one ratio of short to long-term savings and then tweak it as you need to from there. If you feel like you have a tendency to be more present-focused, maybe see how it feels to start contributing more to your long-term ones and whether it’s something you can handle. If you’re like me and have the tendency to have an “all or nothing” approach to saving, try to see how somewhere in the middle suits you, contributing to specific short-term goals that you know will bring you joy a couple years down the line.

How does New Money Rules save for retirement?

At my current employer, they offer the ability to contribute money to a retirement plan managed by Prudential, a very large, professional asset manager and Fortune 500 company. I’m not saying they do it better than someone else does, it is simply the best option for me at my current job to save for retirement. I have a percentage of my income after taxes and health insurance automatically deducted and put into this plan with Prudential. I’ve experimented with what percentage works best for me, and stuck to it. Every 6 months or so I’ll take a harder look at my spending and saving and adjust if needed.

2. Buying a house

We have not yet begun saving for our first house, but plan to do so in the coming years. We are renting a tiny little house on the cheap from my dad, who owns it and allowed us to move into it and fix it up in turn for discounted rent. Sometimes, it’s all about who ya know (or who you meet?).

http://www.houstonpettalk.com/headline/case-studies/

Since we are not homeowners and have never purchased a house, we are starting to do our research on the best way to finance this large purchase. I will admit over the last two years we’ve had these points where we think it’s the right time to buy a house, but looking back, I realize it would have been the wrong time financially for us, all things considered. When the right time comes to buy, I am hoping we will be ready because we have a financial plan in place. Two basic tenets of our plan include the following:

20% payment

good credit

20% payment – A down payment of at least 20% of the price of the house means that you will not have to pay for mortgage insurance which. Depending on the price of the house, your monthly mortgage insurance could be anywhere from around $40 bucks a month for a $100,000 house with a 3.48% (the average right now), 3o-year mortgage to around $370 a month for that same 3.48%, 30-year mortgage on a $400,000 house. It all depends on the price of the house and the rate you’re able to find.

Good credit – You should work to establish good credit before you get a loan. It will pay off in the longer run in the form of a more attractive interest rate. That three digit number is one of the biggest indicators as to how risky you are to a lender. A credit score for a baseline, conventional loan is around 620, but get your score up to the 700s and you may find you qualify for more attractive interest rates. By establishing good financial habits like simply paying your bills on time each month and having a low credit usage to credit limit ratio, you can boost your score. You are also entitled to a free credit report every twelve months which can allow you to fix errors that might wrongly be affecting your credit.

When you feel you’ve got these two things in check, you can go into the home-buying process with the best possible status that can result in savings for years to come. All that adulting can finally payoff.

There they are, my short and long-term financial goals. I truly hope that you take the time to write yours down and come up with a plan to achieve them. The first step is sitting down and thinking about what you want, which can be scary, but worth it. One of the most important things to remember in the process is to make sure you are specific. Otherwise it’s easy for things like procrastination or talking yourself out of things to creep in and take over. You might find that you like this new goal-oriented life of yours and feel encouraged in knowing that good things are coming! You just need to plan for them.